The first phase of the $2.3 billion We Energies power plant in Oak Creek has been generating power less than 40% of the time since it opened in February, beset by operating problems that the utility insists should not worry customers.

The problems have ranged from plugged boiler tubes and debris found in a part during an inspection to vibration problems on a giant pump that serves the plant. All told, the coal-burning plant has generated power for 101 of 263 days since early February - including just one day in August.

The Oak Creek plant was the most expensive construction project in state history. Since early 2006, its costs, along with other factors such as fuel prices and new power lines, have helped push a typical residential customer's electric bill up 33%, or $25 a month.

Customers aren't on the hook for the start-up problems because the plant is under warranty and general contractor Bechtel Power Corp. will cover the cost of the repairs, said Frederick "Rick" Kuester, president of We Generation, the power plant division of We Energies.

"There's a tendency now to want to go look at a few months' performance and get all worried about it," he said. "That would be the wrong approach. You've got to look at this over the long term."

Kuester said the problems are not a surprise, given the start-up challenges that regularly face massive and complex construction projects such as power plants that are built to last for at least 40 years.

But customer groups remain troubled, and auditors at the Public Service Commission are looking into the problems as part of their audit of the company's pending rate case.

The recurring problems raise the question of whether the utility should have accepted the keys to the plant when it did, said Charlie Higley, executive director of the Wisconsin Citizens' Utility Board, which represents residential and small business customers.

"When you lease a car, you lease one that works. You wouldn't want to pay for a car that's not working under a lease arrangement," Higley said. "That's the same analogy that should be applied here. The ratepayers should not be paying for this plant until it's properly operating."

Rate increases tied to the power plant began hitting customers' bills in 2006, after construction of the two plants began. Payments linked to the plant are financed through a unique leasing arrangement under which one subsidiary of Wisconsin Energy Corp. is leasing the plant to the utility, We Energies. Under those terms, We Energies is allowed to recover a 12.7% profit on its investment in the plant.

But ratepayers aren't seeing higher bills in 2010 because of the Oak Creek issues, Kuester said.

Those problems did lead to higher-than-projected fuel costs, which would have allowed the utility to ask state regulators for a rate hike this past summer - but it chose not to do so, Kuester said.

"We as a management team made the decision not to do that, and part of the reason was the way the plant has operated, and there were other factors as well," he said.

As a result, he said, We Energies shareholders, rather than customers, will be responsible for the extra $40 million to $50 million in fuel-related costs that resulted from the breakdowns. That fuel has helped keep other plants running when Oak Creek was shut down.

We Energies' parent company, Wisconsin Energy, is due to report its quarterly earnings on Tuesday. Based on its results so far, investment analysts surveyed by Thomson First Call are projecting that the company will report a record year in 2010, with profit expected to rise by 17% to nearly $450 million.

Weighing problems

Kuester, who has worked on power plant projects in the United States as well as Asia, said it's typical to have lower output from a power plant in the first few years of its life and in the final few years before it's retired.

Energy industry observers agreed. According to the Michigan Public Service Commission, "Plants, in their infancy, often require more frequent outages and maintenance than plants that have been tried and tested over time."

Customer groups, though, said they want to ensure that ratepayers don't take the fall for the problems at the new plant.

"We hope that We Energies will live up to its promises to leave ratepayers unharmed by these start-up issues," Higley said, "and then also it's important for the Public Service Commission to help ensure this outcome as well."

We Energies' largest customer, an operator of two iron ore mines in the Upper Peninsula of Michigan, raised performance problems at the Oak Creek power plant as one of its arguments in an appeal it filed over the utility's 14% rate hike for Upper Peninsula customers that took effect this year.

"Throughout this entire proceeding, (We Energies) has touted the new . . . facility as being highly efficient with relatively low fuel costs," a lawyer for the Tilden and Empire mines argued. "Had the facility truly been commercially operational beginning in February, the facility would have been operating. The facts now show that the facility was, in fact, not operating at all until April 2010."

The mines, operated by Cliffs Natural Resources Inc., contended that they should not have been billed for Oak Creek-related costs in March and April.

But the Michigan Public Utility Commission rejected the mines' argument, saying that the plant was declared operational because it passed a series of start-up tests before Feb. 2. The plant's readiness status was confirmed by an independent evaluator hired by Wisconsin regulators, the commission said.

Costs out next year

Kuester says any costs linked to the Oak Creek start-up problems won't increase the construction price tag for the project.

The final tally for the construction costs won't be made public until next year, after the second phase of the coal plant is completed. That unit was running at full power late last week in testing mode and is expected to be declared complete by Nov. 28.

In recent reports, R.W. Beck & Co. projected that the final cost of the project will come in at $2.33 billion. We Energies owns 83% of the project, meaning its share of the cost would be $1.95 billion, with the remainder to be split by co-owners MGE Energy Inc. of Madison and WPPI Energy of Sun Prairie.

Meanwhile, costs linked to construction delays at Oak Creek are expected to be another issue the utility and customer groups will debate next year during the back-and-forth over a regulatory case that would set rates for 2012 and 2013.